Two issues that are raised in the discussions around the enormous Greek debt have surprised me. Let’s have a look at them and I am curious to hear what you think of them.

When we follow the news, we come across the following topics:
•    Germany will or will not bail out Greece
•    The Euro drops to the lowest rate in a year compared to the dollar

Let’s have a look at this Germany bailing out Greece and what the Euro has to do with it.

Who is really helped here when there is a bail out?

If Germany helps Greece to re-finance its debts (bailing her out), who is really helped here? If Greece would default on the re-payments of its loans to the investors who bought its bonds, a solution would need to be negotiated.

The outcome is probably that the investors get eventually only 80%, 60%, 40% or another percentage back from the money that they invested initially. Or they get the promise that they get the full amount back, but many years later than that they originally agreed. Who knows if these new promises are kept? The original bonds are based on a re-pay promise as well.

Both scenarios are not very good for the investor. But, if Germany helps Greece to refinance its debt, the current investors get their full money back and are saved. Now it is Germany that eventually needs to get its money back from Greece.

If Germany has more money than it needs or more than it knows how to spend (which is probably not the case), it could decide to spend it on Greece. However, Germany knows that if in the future Greece cannot refinance the loans it has to pay back to Germany, there will be nobody else who will step in at that moment to bail out Greece again.

Greece making an 180 degrees turn?

Thus then the only chance for Germany to gets its money back is when Greece gets its finances in order. In stead of having an annual deficit of 14% of its GDP and costs that are increasing way much faster than its income (thus the problems are still getting worse), Greece would have to make a 180 degree turn in its financial management.

There is no proof in history that they can do this. And the people demonstrating on the Greek streets do not give the impression that there is a widely understood urgency in Greece for the need to do something that hurts severely in the short term but is a final necessity anyhow.

Investors should carefully study what they invest in, understand the type of assets they invest in and diversify their investments sufficiently (or not invest at all) if they do not study or understand this. The investors with a considerable exposure to Greek bonds have not done their home work or took a risk that they now may have to pay for.

Overall and not seeing the total picture of course, I would not know why Germany should bail out Greece and take over the potential losses of the current investors in Greek bonds.

Please share your views and insight on this with the readers by commenting on this blog post at the bottom of the page.

And now the second issue: the Euro.

Why would the Euro be so much affected by the Greek debt crisis?

Yes, German, Dutch, French and Greek bonds are all in Euro. But a Greek bond in Euro is a loan from the investors to Greece and not to anyone else. So, if Greece would default on its bonds that are nominated in Euros, it is defaulting on its Greek bonds and not on the Euro.

Compare it with e.g. Enron defaulting on its bonds. They were nominated in US dollars. Enron defaulted on its bonds, but that does not mean that it is the end of the US dollar. Of course, Greece is probably a larger part of the Euro than that Enron was of the US economy, but it is still a minor part. Even Greece, Portugal and Ireland together are not that significant.

Of course, when some of the smaller countries in the Euro zone would default on their bonds, the enthusiasm from investors to invest in these countries would reduce. Therefore those countries would have to pay much higher interest rates on their bonds than other Euro countries like Germany and France. But so it is.

And yes, Greece and the others do not have the chance to devaluate their currency. Correcting their mistakes from the past will hurt. So it is again. But in any case, their population will not have to face hyper-inflation and lose all their savings.

Those who worked hard, who saved and who kept their finances in order, have not much to fear. Those who spend more than they earned will have to sit on their blisters and bite their teeth till they have corrected their past behaviour. This is valid for both countries and individuals.

Share your views on this with our readers by commenting on this blog post at the bottom of this page.
 

Lessons for investors

What should investors take away from all this? See here three lessons:

1)    “Return on investment” only becomes relevant when “return of investment” is secure. A few percent more interest when there is a realistic chance to get e.g. only 70% of your investment back is not making the average investor very happy. Better be safe than sorry.

2)    Understand the assets classes behind and the risks of the investments that you make. Country bonds do not offer the guarantee that you will always get all your money back. No investment is 100% safe. When you make large investments in one particular asset, you need to do your homework to understand the financial situation behind that asset.

3)    When you invest outside main-stream, the issue is not only what the value is of your assets, but the question is also “who wants to buy them”. The point I want to make here is that when non-main-stream assets gets hammered or when they are seen as risky, nobody wants to buy them anymore!

That is maybe illogical, because the risk is not that high etcetera, but just nobody is interested. And if you really want to sell, you need to ask an unreasonable low price to get rid of these assets. There is just no liquidity in the market for it. We stay main-stream with our investments. Let the hedge funds or so take these risks on the fringes.

At Stock Trend Investors, we keep it simple. We invest in funds of stocks, not bonds. And we invest in main stream index funds or widely spread, large mutual funds to avoid a liquidity trap and to make sure our investments are properly diversified.

Please share your opinion on what you think of a Greek bail-out and the impact on the Euro of all this.